We show you how it's possible to reduce your personal tax liability when trading through a company.
You need to understand that your company's tax and your personal tax are totally separate. Assuming no other income, your personal tax is based on how much you've paid yourself from the company in salary and dividends between 6 April and 5 April every year. Your company's corporation tax is based on your company's own specific year end that usually does differ from the personal tax year. For example, a company started in December will have an accounting period from 1 January to 31 December.
Company Corporation Tax
Company Profit and Loss:
Add: £100,000 Sales
Less: £12,500 Wages
Less: £5,000 Pension
Less: £1,000 Accountancy
Less: £4,500 Travel
Less: £2,000 Computer Equipment
Profit: £75,000
Less: £13,300 Corporation Tax @ 19%
Reserves: £61,700
If you have a sole trade or are employed, you pay tax on the £75,000 profit in the year that you earn the money.
However, as a limited company you can pay the corporation tax rate of 19% on your profits and keep the money within the company indefinitely without paying any additional personal tax. This means you can tax plan, as you only pay personal tax when you pay out the company reserves as a dividend.
Personal Tax
Tax Bands 2019/20:
0 - 12,500 Personal Allowance = 0%
12,500 - 50,000 Basic Rate
50,000 - 150,000 = Higher Rate
Over 150,000 = Additional Rate
Dividend Tax Rates 2018/19:
Tax Free £2,000 = 0%
Basic Rate Tax = 7.5%
Higher Rate Tax = 32.5%
Additional rate Tax = 38.1%
Example 1
In the 'company corporation tax' example above let's assume that I pay the company reserves all out in dividends meaning that I'd taken £12,500 in salary and £61,700 in dividends. I would pay the following in personal tax:
Personal Allowance = £12,500 x 0%
Tax Free Dividend = £2,000 x 0%
Basic Rate = £37,500 x 7.5% = £2,812
Higher Rate = £22,200 x 32.5 = £7,215
Total Personal Tax = £10,027
Example 2
Alternatively, if out of the £61,700 in attributable dividends I only took £39,500 and I left £22,200 in the company my personal taxes would be as follows:
Personal Allowance = £12,500 x 0%
Tax Free Dividend = £2,000 x 0%
Basic Rate = £37,500 x 7.5% = £2,812
Total Personal Tax = £2,812
I could then take the £22,200 out in a later tax year (potentially at a lower personal tax rate).